Release Date: 27 October 2015

The Western Union Company

Accounting Concerns and a Tax Black Hole

Ticker:

WU.NYSE

Market Cap:

US$10 billion

Recent Price:

US$19.64

Target Price:

US$13.75

Expected Return:

-30%

Opinion:

Strong Sell

WU has only missed earnings estimates

once since the beginning of 2012, and we
find these consistent earnings beats
questionable, especially from a mature
company facing secular decline.

We have concerns over WUs accounting

as it relates to cost capitalization and
believe Management is manipulating
earnings to influence its share price.

WUs unusually low tax rates, combined

with the nature of a business model,
viewed by many as predatory, raise
concerns of public policy backlash.

You should have expected us

anon.analytics@neomailbox.ch
Twitter: @anonanalytics
www.anonanalytics.com

Disclaimer
Neither Anonymous Analytics nor its principles is a registered investment advisor or otherwise licensed in any
jurisdiction, and the opinions expressed herein should not be construed as investment advice. This report expresses our
opinions, which we have based upon publicly available facts and evidence collected and analyzed including our
understanding of representations made by the managements of the companies we analyze, all of which we set out in our
research reports to support our opinions, all of which we set out herein. We conducted basic research based on public
information in a manner than any person could have done if they had been interested in doing so. You can publicly
access any piece of evidence cited in this report.
All facts, figures, and opinions are as at the last practicable date. This document has been prepared for informational
purposes only. This document is not an offer, or the solicitation of an offer, to buy or sell a security or enter into any
other agreement. We have made every effort to ensure that all information contained herein that support our opinions
is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable, and who are
not insiders or connected persons of the stock or company covered herein or who may otherwise owe any fiduciary duty
to the issuer. However, we do not represent that it is accurate or complete and should not be relied on as such, in
particular, The Western Union Company (WU or the Company) and insiders, agents, and legal representatives of WU
and other entities mentioned herein may be in possession of material non-public information that may be relevant to
the matters discussed herein. Do not presume that any person or company mentioned herein has reviewed our report
prior to its publication.
As evident by the contents of our research and analysis, we expend considerable time and effort to ensure that our
research analysis and written materials are complete and accurate, we strive for accuracy and completeness to support
our opinions, and we have a good-faith belief in everything we write - but such information is presented as is, without
warranty of any kind, whether express or implied. All expressions of opinion are subject to change without notice, and
we make no representation, express or implied, as to the accuracy, timeliness, or completeness of any such opinions and
information or with regard to the results to be obtained from its use, and we makes no representation that we will
update any information on this. You should assume that all statements contained herein are our opinion and are not
statements of fact even if certain statements can be perceived as such. That way, we dont have to sacrifice our
(hopefully) entertaining writing style by starting every sentence with In our opinion as advised by our team of
neurotic and overpriced lawyers.
We believe that the publication of our opinions and the underlying facts about the public companies we research is in
the public interest, and that publication is justified due to the fact that public investors and the market are connected in
a common interest in the true value and share price of the public companies we research. We are exercising our right to
express such opinions in a public forum. Any investment involves substantial risks, including complete loss of capital.
Any forecasts or estimates are for illustrative purpose only and should not be taken as limitations of the maximum
possible loss or gain. Any information contained in this report may include forward-looking statements, expectations,
and projections. You should assume that these types of statements, expectations, and projections may turn out to be
incorrect.
Anonymous Analytics itself holds no direct or indirect interest or position in any of the securities profiled in this report.
However, you should assume that certain of Anonymous Analytics research and due diligence contacts, consultants,
affiliates, and/or clients may have a short position in the stock or debt of WU and/or options of the stock, and therefore
stand to gain substantially in the event that the price of the stock decreases. You should further assume that following
the distribution of this report, the aforementioned individuals and entities may continue transacting in the securities
covered therein, and may be long, short or neutral at any time hereafter regardless of this reports initial opinions.
Dont be stupid and invest in the public markets unless you are prepared to do your own homework and due diligence.

Executive Summary
The fundamentals of Western Union (the Company, WU) are deteriorating and the Company has
been losing agent exclusivity. Although Management has been resistant to any aggressive price cuts, we
believe such cuts are imminent. The last time WU initiated large price cuts was in 2012, and following
the announcement, the share price dropped 30%. We believe a repeat is likely.
We also have concerns over WUs accounting. WU has only missed earnings estimates once since the
beginning of 2012 (14 quarters). We find these consistent earnings beats questionable. The earnings of
such a mature company facing secular decline shouldnt be that hard for Wall Street's finest to forecast.
Based on the evidence and available information we have reviewed and analyzed, all of which we set
out herein, we believe that WU is manipulating its EPS numbers through cost capitalizations in order to
beat analyst estimates and directly influence its share price. Our analysis suggests that since the
beginning of 2012, the Companys largest quarterly share price declines have been followed by
unusually large capitalization of contract costs. Because capitalized costs dont flow through the income
statement, we believe WU was able to report more favorable earnings results to the market, which in
turn had the effect of either stemming the share price decline, or reversing it.
WUs reported tax rates have also been declining over the years and are some of the lowest among our
analysis of multinationals. There is growing discontent over tax minimization strategies, which have
become a hot topic for countries the world over. In Europe, numerous governments are strapped for
cash while in much of the rest of the world countries that relied on the commodities boom are seeing
large holes in their budgets. Companies like WU, which are already viewed by many as preying on the
poor,1 do business in all these countries, yet appear to pay little, if any taxes. From a public policy
perspective, we take issue with WUs low tax rates, and believe they face severe headline risk. If
anything, the case of Valeant is a sobering reminder of the problems that can quickly spawn when
corporate practices are seen as exploitive and unfair.2

http://www.theguardian.com/global-development/2014/nov/29/money-transfer-companies-remittances-tessajowell
2
http://www.nytimes.com/2015/09/21/business/a-huge-overnight-increase-in-a-drugs-price-raises-protests.html

Introduction
Western Union is a provider of money transfer services, operating through a network of approximately
500,000 agents globally.
Where once WUs yellow signs were synonymous with money transfers, the industry is now crowded
with countless convenient alternatives, ranging from electronic options such as Paypal, Xoom, and
numerous start-ups, to more traditional brick-and-mortar options, such as Moneygram (MGI) and Ria.
Recently, even Wal-Mart jumped into the arena with its own money transfer service.3
While more traditional operators are making WUs dominance in the legacy retail space a distant
memory, the entire industry is being displaced by online and digital alternatives. WUs near-monopoly in
the global money transfer industry and its premium pricing is being eroded by these disrupters the same
way the taxi industry is being dismantled by Uber.4
With an industry ripe with fresh competition, any portfolio manager that owned the stock over the last
five years should have been fired, because the stock has gone nowhere while the market is up ~70%.
Exhibit 1
WU vs S&P500

Source: Google Finance

http://www.forbes.com/sites/halahtouryalai/2014/04/17/walmarts-new-money-transfer-service-should-bankswestern-union-and-moneygram-be-nervous/
4
http://www.google.ca/finance?q=NASDAQ%3ATAXI&ei=BkH8VcmLHojAsAGkk5foDQ

Aggressive Price Cuts Imminent

There is perhaps no better indication of WUs deteriorating fundamentals than its agent locations count.
WUs agent count peaked in Q2 2013 at 520,000 locations. In Q3 2013, the Company disclosed its agent
count at 515,000. 5 The latter disclosure was notable because it marked the first agent decline in the
Companys history, and it was also the last time the Company would disclose this number.
Today, the only disclosure WU provides concerning its agent count is a vague statement noting that the
Company has a combined network of over 500,000 agent locations6 For a company that once took
pride in its vast network of agent locations, and paraded them as a clear advantage over competitors,
Managements recent lack of disclosure on the subject is telling.
WU had envisioned having 1 million touch points as recently as 2012.7 But that seems like a distant
memory now. In the meantime, competitors have been ramping up their own agent locations and
choking WU of any effective monopoly it may have held in the past. For example, MGI has increased its
agent locations by 50% from 233,000 to 353,000 since the beginning of 2011.8
Likewise, Ria has been on its own agent acquisition spree, increasing its location count by 150% from
107,700 to 272,000 in the same time period.9
Exhibit 2
WU, MGI, and Ria Agent Location Growth
600,000
500,000
400,000
300,000
200,000
100,000
0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2011

2012
WU

2013
MGI

2014

2015

Ria

Source: company filings, WU Q4 2013 to Q2 2015 numbers based on our estimates

http://ir.westernunion.com/files/doc_news/Western%20Union%20Q3%20Earnings%20Release%20102913_v001
_v83b13.pdf pg. 8
6
http://ir.westernunion.com/files/doc_financials/Q2Y15/Q2-2015-Earnings-Release-FINAL-2.pdf pg. 6
7
Q1 2012 conference call
8
SEC Filings
9
SEC filings

Along with agent locations, WUs revenue also peaked, reaching US$5.6 billion in 2012. Since then,
revenue has declined as growth rates have turned negative:
Exhibit 3
Year-over-Year Revenue Growth/Decline Rate
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2011

2012

2013

2014

2015

Source: Company filings, Capital IQ

Part of the issue is pricing. WU believes its brand carries a trust factor which allows it to charge
premium prices.10 Globally, WU charges 15% to 20% more than its competitors.11
We believe Managements notion of charging a 20% trust premium is antiquated. WU is no longer the
only visible player in global remittance, and as more competitors become established and take
mindshare, WU will be left with two options: keep its premium pricing and lose market share, or cut
prices and lose on margins. Both scenarios are unenviable.
For all the talk of premium pricing, this rhetoric was put to the test in 2012 as competition ate away at
WUs market share. In response, WU was forced to announce an accelerating pricing investment
strategy12 which is just a really obnoxious way of saying aggressive price cuts. Following the
announcement, the share price responded with a 30% drop:

10

http://seekingalpha.com/article/2905026-western-unions-wu-ceo-hikmet-ersek-on-q4-2014-results-earningscall-transcript?part=single
11
Ibid
12
http://seekingalpha.com/article/963351-the-western-union-management-discusses-q3-2012-results-earningscall-transcript?part=single

Exhibit 4
Market Response to Price Cut Announcement

Source: Yahoo Finance

WUs aggressive price cuts led to some short-term, albeit fleeting market share gains as C2C transaction
activity rebounded sharply in 2013, and was followed by nominal revenue growth in 2014:
Exhibit 5
C2C Revenue and Transaction Growth
(% change year-over-year)
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%
-10%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2011

2012

2013

Revenue growth

2014

2015

Transaction growth

Source: Company filings

Credit where its due, this play-out is consistent with Management commentary regarding price cuts at
the time:
I know it's about 12 to 18 months. It may -- in most of the time, within the 12 months,
the revenues are coming back. And the first 2 months, you will immediately see the
transaction increase market share's gain, and we have done that, and we will be active
on the market to gain market share.
-CEO Hikmet Ersek, Q3 2012 conference call
6

However, any lasting benefits from the 2012 price cuts are elusive. While transactions did rebound
immediately following the price cuts, those same growth rates have dropped dramatically in the last
three quarters. Moreover, the revenue growth Management was hoping for seems muted. C2C revenue
only grew for a portion of 2014 barely only to once again return to negative territory.
When WU announced the aggressive price cuts back in 2012, revenue growth, transaction growth, and
principal per transaction in the C2C segment (representing 80% of revenue)13 were deteriorating
materially in the four quarters prior to the announcement:
Exhibit 6
C2C Segment Drivers - Then
2011

2012

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Revenue

4.6%

7.6%

5.8%

2.6%

4.3%

0.0%

-3.5%

Transactions

6.5%

6.1%

5.0%

5.1%

6.7%

3.9%

-0.3%

Principal per transaction

0.8%

4.0%

3.1%

-2.0%

-3.9%

-5.8%

-6.6%

Source: Company filings

Today, the situation is worse. Revenue growth has already turned negative, transaction growth is more
sluggish than last time, and principal per transaction is far deeper in negative territory:
Exhibit 7
C2C Segment Drivers - Now
2014

2015

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Revenue

2.6%

2.1%

2.0%

-1.8%

-3.6%

-2.7%

Transactions

8.7%

6.1%

4.6%

1.9%

2.5%

2.8%

Principal per transaction

-0.9%

0.3%

0.0%

-3.6%

-6.8%

-7.3%

Source: Company filings

Given the pattern, we believe WU will be forced to pursue a second round of accelerating pricing
investment similar to 2012 when the stock dived 30%. On the Q2 conference call in July, CFO Rajesh
Agrawal stated, I dont feel that for this year were going to do big pricing investments.14 This
statement implies big price cuts are on the table and only a matter of time, but given the sharp turn in
the business, we dont see how the Company can wait.

13

http://www.sec.gov/Archives/edgar/data/1365135/000136513515000042/wu-6302015x10q.htm pg. 34
http://seekingalpha.com/article/3380215-the-western-unions-wu-ceo-hikmet-ersek-on-q2-2015-resultsearnings-call-transcript?part=single
14

Moat? What Moat?

A common sound-bite is that WU is a great business because its agent locations give it a moat.15
No it doesnt, because this isnt 1993.
Generally, WU signs on agents at existing retail stores such as pharmacies and post offices. These
locations do not require any additional investments to become WU agents, and any agency fees
translate to ~100% incremental margins for the establishment. It was this promise of additional income
at minimal investment that once allowed WU to recruit agents and rapidly expand its global footprint.
However, this barrier-free model is now being used by competitors to recruit their own agents, often at
the same locations as WU. Representatives from MGI and Ria can (and do) go to locations where WU
has a presence and ask the location to also sign on as their agent. With little to no incremental costs and
the option of additional income streams, the WU agents have little reason not to sign up with other
money transfer operators as well.
To maintain its moat and prevent this type of competitive incursion, WU has historically signed
exclusivity agreements with its agents. However, more and more countries are deeming these
agreements anti-competitive, and thus illegal. The first of these countries were Russia and Ukraine circa
2007, but the list has grown considerably in the last eight years.
A few short years ago, almost all of WUs agents were exclusive. Today, most of WUs agents are nonexclusive, electing to become agents for multiple brands under the same roof, as evidenced by the
changing language in WUs disclosures over time:
2007 10-K: nearly all of the Western Union branded agents offer our services on an exclusive basis
Russia and Ukraine have each enacted laws that effectively prohibit exclusive arrangements with
banks in those countries.
2009 10-K: most of our Western Union branded agents have offered our services on an exclusive
basis Recently, several countries in the Commonwealth of Independent States, Africa and South Asia
have promulgated laws or regulations that effectively prohibit exclusive arrangements with agents in
those countries.
2012 10-K: most of our Western Union branded agents offer our services on an exclusive basis
Recently, several countries in Eastern Europe, the Commonwealth of Independent States, Africa and
South Asia, including India, have promulgated laws or regulations which effectively prohibit exclusive
arrangements with agents in those countries. In addition to legal challenges, certain of our agents and
their subagents have refused to enter into exclusive arrangements.
2014 10-K: many of our Western Union branded agents have agreed to offer only our money transfer
services Over the past several years, several countries in Eastern Europe, the Commonwealth of
Independent States, Africa and South Asia, including India, have promulgated laws or regulations
15

http://seekingalpha.com/article/3352295-theres-still-value-left-in-western-union

which effectively prohibit exclusive arrangements with agents in those countries. In addition to legal
challenges, certain of our agents and their subagents have refused to enter into exclusive arrangements.
The inability to enter into exclusive arrangements or to maintain our exclusive rights in agent
contracts in certain situations could adversely affect our business, financial condition or results of
operations by, for example, allowing competitors to benefit from the goodwill associated with the
Western Union brand at our agent locations.
In 2012, WU lost its near 20-year exclusive relationship with Grupo Elektra in Mexico.16 Since then, WUs
business in Mexico a key market has suffered as the Company has cut commission rates to stay
competitive. Between 2012 and the most recent quarter, WU slashed its total fees for the US-Mexico
corridor by 26% for a US$200 principal transfer:
Exhibit 8
US-Mexico Commission, Cash-to-Cash
(as a percent of US$200 principal)
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
Q1

Q3

Q1

2011

Q3

2012

Q1

Q2

Q3

Q4

Q1

2013

Q2

Q3

2014

Fixed fee

Q4

Q1

Q2

2015

FX fee

Source: World Bank

WUs price cut in the US-Mexico corridor is by no means unique. Remittance companies are often seen
as predatory, charging the lower economic strata obscene fees to remit money to their families. These
often unbanked individuals and migrant workers are the most in need of consumer protection
measures. Accordingly, governments of all stripes with input from a key World Bank program have
been aggressively focusing their regulatory efforts on ending egregious remittance fees and
monopolistic business practices.17 As more countries pass legislation to ban the type of exclusivity
agreements that WU had formerly enjoyed, WUs dominant position in the market will continue to
erode to the benefit of rivals and consumers.

16
17

http://www.reuters.com/article/2013/02/13/us-westernunion-results-idUSBRE91B1HA20130213
http://www.worldbank.org/en/results/2014/04/04/savings-of-44-billion

Not only have WUs revenue figures declined after hitting a peak in 2012, margins have deteriorated as
well. Exhibit 9 shows MGIs and Rias footprint over time (as measured by WU/MGI and WU/Ria ratios),
relative to WUs C2C operating margins (C2C represented over 100% of WUs operating profit in Q2):18
Exhibit 9
Agent Location Ratio vs C2C Operating Margins
(Ratio left side, margin % right side)
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0

50%
45%
40%
35%
30%
25%
20%
15%
10%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2011

2012
WU/MGI

2013
WU/Ria

2014

2015

C2C Operating Margins

Source: SEC filings

At the beginning of 2011, WU had nearly 2 agent locations for each MGI location, and enjoyed C2C
operating margins of 28.6%. Today those figures stand at 1.4 and 23.3%, respectively, representing a
decrease in margins of 530 basis points. Our regression analysis shows that there is a high correlation
between MGIs increasing footprint and WUs decreasing C2C operating margins, with an R2 of 78%:
Exhibit 10
Correlation between MGI locations and WUs Operating Margins

Source: Minitab, our analysis

18

http://www.sec.gov/Archives/edgar/data/1365135/000136513515000042/wu-6302015x10q.htm

10

As the gap in agent count between WU and its competitors narrows, and as more agents refuse to sign
exclusivity contracts, WUs revenue and margins will both continue to decline. This decline is likely to
persist indefinitely. While WU location count has already peaked, competitors continue to expand
aggressively.
WU has a moat? Doubtful.

11

Digital Disruption

A conversation 10 years from now

Person A: Hey, remember back when you had to actually walk to the
super market to send money to someone?
Person B: No.
Person A: Yeah, me neither.

Digital Competition
WUs core business is its retail-based cash-to-cash transfer operations, which caters extensively to the
worlds unbanked population. WU clearly dominates the physical remittance space owing to its global
network of agent locations. However, while competition from the likes of MGI and Ria have increased in
this legacy space, the proportion of the worlds unbanked population has simultaneously shrunk.
Between 2011 and 2014, the global percentage of adults with an account increased from 51% to 62%.19
Meanwhile, a sea of disruptive digital alternatives has emerged in the money remittance space offering
convenience and record low transfer fees.
WU has tried to stay relevant in the digital space by launching online transfer services through
westernunion.com (WU.com). While WU.com showed strong growth in its early days given its small
starting base, WUs digital offerings have fallen far short of expectations. Initially, Management had
targeted US$500 million revenue from digital by 2015. But that target became unrealistic and the date
was pushed out to beyond 2015.20 For fiscal 2014, revenue from digital represented only 6% of total
Company revenue, or US$336.4 million, up from US$277 million in 2013.21
WUs failure to hit its mark on digital may have to do with the fact that consumers dont necessarily
think of WU as an online player. WU has historically been associated with a physical store-front with a
yellow sign and bulletproof glass with a small slit to interact with agents. When people want to send
money digitally, they look to options that specialize in online services. For example, Google Trends
shows that searches for Xoom.com are nearly 4x as popular as searches for westernunion.com. Xoom is
a prominent online money transfer service that currently operates in 39 countries, and offers cash
pickup, direct deposits, and to-your-door money delivery:22

19

http://www.worldbank.org/en/news/press-release/2015/04/15/massive-drop-in-number-of-unbanked-saysnew-report
20
Q2 2014 conference call
21
Company filings
22
https://www.xoom.com/about

12

Exhibit 11
Xoom.com (red) vs Westernunion.com (blue)

Source: Google Trends

What Happens When Xoom Enters a Market?

While the Company does not break out revenue beyond its US-US and US-Mexico corridors, US-India,
US-Philippines, and US-China are also key markets, as evidenced by WUs US website, where the US,
China, India, Mexico, and the Philippines are first-choiced on the Destination menu:
Exhibit 12

Source: https://www.westernunion.com/us/en/price-estimator/start.html

13

Xoom already has an established presence in Mexico, India, and the Philippines. As a response to
competition, WU has lowered its online transfer fees in these corridors by between 20% to 44% since
2012, according to World Bank data. By contrast, fee transfers to China, where Xoom has been absent,
have remained high. However, Xoom announced earlier this year that it is now entering China and we
expect that WU will have no choice but to cut its prices in in the country to stay relevant.23
Exhibit 13
Total Fees for Online, Same-Day Transfers
(as a % of US$200 principal)
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
Q1

Q3

Q1

2012
US-Mexico

Q2

Q3

Q4

2013

Q1

Q2

Q3

Q4

2014

US-India

US-Philippines

Q1

Q2

2015
US-China

Source: World Bank data

As Xoom expands its geographic presence, we expect WU will have no choice but to continue to cut its
online prices. This July, Paypal offered to acquire Xoom for US$890 million.24 With the acquisition, Xoom
will have funding and network access to accelerate its geographic expansion from 39 countries to all
over the world.

23
24

http://www.sec.gov/Archives/edgar/data/1315657/000155837015000665/xoom-20150331x10q.htm pg. 17
http://www.wsj.com/articles/paypal-to-buy-money-transfer-company-xoom-1435786997

14

Accounting Concerns
Given all the competitive and structural challenges facing WU, its surprising that the Companys share
price has resisted gravity and managed to stay unchanged over the last five years. However, our analysis
of the available evidence suggests that the Company may be manipulating its earnings in order to
directly influence its share price.
Going as far back as nine years to its 2006 spin-off as a public company, WU has only missed earnings
estimates three times in 36 quarters, according to Capital IQ. More recently, WU has only missed
earnings estimates once since the beginning of 2012 (14 quarters):
Exhibit 14
Quarterly Earnings Surprise
25%
20%
15%
10%
5%
0%
-5%
Q1

Q2

Q3

Q4

Q1

Q2

2012

Q3

Q4

Q1

Q2

2013

Q3

Q4

Q1

2014

Q2

2015

Source: Capital IQ

We find these consistent earnings beats questionable. The earnings of such a mature company in secular
decline shouldnt be this hard for Wall Street's finest to forecast. In contrast, WU has only managed to
beat quarterly revenue estimates half the time since 2012:
Exhibit 15
Quarterly Revenue Surprise
3%
2%
1%
0%
-1%
-2%
-3%
-4%
Q1

Q2

Q3

2012

Q4

Q1

Q2

Q3

2013

Q4

Q1

Q2

Q3

2014

Source: Capital IQ

15

Q4

Q1

Q2

2015

The probability distribution of revenue beats reflects what we would expect from numbers that were
not a function of management influence. Revenue recognition under GAAP is far less susceptible to
accounting games than earnings. On the other hand, we believe the consistent and unlikely earnings
beats are either the result of analysts systematically low-balling their earnings estimates over the course
of nearly a decade, or WU is engaged in earnings management to meet or beat EPS estimates in an
attempt to prop up its share price.

Capitalizing Costs and Share Price Pops

Our analysis shows that since the beginning of 2012, the largest quarterly share price declines have been
followed by substantial capitalization of contract costs by WU. Since capitalized costs dont flow through
the income statement, we believe WU was able to report more favorable earnings results to the market,
which in turn had the effect of either stemming the share price decline, or reversing it:
Exhibit 16
Share Price Movement and Cost Capitalization

2012

2013

2014

2015

Earnings Date

Price before
Earnings

Price before
Previous
Earnings

Decline Since
Last Q

Cost
Capitalization

Reported
EPS Beat (%)

Adjusted
EPS Beat (%)

Q1

24-Apr-2012

$17.95

$19.70

-8.9%

55.8

0%

-7%

Q2

24-Jul-2012

$16.95

$17.95

-5.6%

22.5

7%

11%

Q3

30-Oct-2012

$17.93

$16.95

5.8%

38.8

2%

0%

Q4

12-Feb-2013

$14.34

$17.93

-20.0%

57.8

20%

8%

Q1

30-Apr-2013

$14.81

$14.34

3.3%

11.8

12%

22%

Q2

30-Jul-2013

$16.98

$14.81

14.7%

30.3

6%

5%

Q3

29-Oct-2013

$19.24

$16.98

13.3%

26.8

8%

9%

Q4

11-Feb-2014

$15.88

$19.24

-17.5%

50.4

-3%

-12%

Q1

1-May-2014

$15.85

$15.88

-0.2%

16.6

6%

13%

Q2

31-Jul-2014

$17.47

$15.85

10.2%

27.8

0%

1%

Q3

30-Oct-2014

$16.70

$17.47

-4.4%

4.6

16%

27%

Q4

10-Feb-2015

$18.40

$16.70

10.2%

24.1

24%

28%

Q1

30-Apr-2015

$20.28

$18.40

10.2%

17.2

3%

8%

Q2

30-Jul-2015

$19.02

$20.28

-6.2%

57.5

5%

-2%

Average

31.6

Std Dev

17.1

Source: Company filings, our analysis. Adjusted EPS Beat represent our calculations of how much WU would have
beat/missed earnings if they had expensed capitalized costs in excess of the $31.6 million average.

16

Since 2012, WU has averaged US$31.6 million in the capitalization of contract costs per quarter, with a
standard deviation of US$17.1 million. In effect, we would generally expect quarterly capitalization
costs to fall below US$48.6 million most of the time.
However, in Q1 2012, Q4 2012, Q4 2013, and most recently, Q2 2015, WU reported capitalized contract
costs outside this upper range. The timing of these four deviations is suspect, because they came
directly after the four worst quarterly share price performances since 2012.
More recently, WU reported large capitalization of contract costs last quarter, beating earnings
estimates. Our adjustments suggest that if WU had capitalized contract costs consistent with its
historical average, it would have actually missed Q2 2015 EPS estimates by 2%, all else equal. This isnt
too much of a surprise given how sharply C2C fundamentals deteriorated in the most recent quarter.

17

Tax Black Hole

With little explanation, WUs tax rate has perpetually declined over the years:

Guidance of 25% tax rate for 2011,25

Guidance of 16% tax rate for 201226
Guidance of 15% for 201327 and 201428
Guidance of 13% for 2015.29

We are hard-pressed to find many companies with such low tax rates. By comparison, Euronet
Worldwide (EEFT.NASDAQ), the owner of the Ria, reports annual tax rates of 25% or more.30
In the most recent quarter, WU reported a tax rate of 8.5% (11.8% normalized), which is already lower
than the 13% tax rate it initially guided for 2015, and further helped the Company beat Q2 estimates.
Unfortunately, WU provides little information to justify its tax rates. For example, on the Q4 2014
conference call, when an analyst asked how the Company managed a 6% tax rate in the quarter, the CFO
responded: I wont get into the details of which specific items drove our tax rate down in the fourth
quarter.31 Perhaps one day WU will realize that its a publicly-traded company and disclosing how taxes
affect shareholder earnings comes with the territory.
Responding to its low tax rates more broadly, Management stated that they were the result of operating
in very low tax jurisdictions and ongoing tax planning.32 The ongoing tax planning statement
doesnt really say anything, but we find the low tax jurisdiction justification questionable.
Among the top ten remitter and receiver countries that we analyzed, the weighted average corporate
tax rate was 29%. These countries represent nearly half of all global remittance activity:

25

Conference call Q4 2010

Conference call Q2 2011
27
http://seekingalpha.com/article/1176841-the-western-union-management-discusses-q4-2012-results-earningscall-transcript?part=single
28
http://seekingalpha.com/article/2013091-the-western-union-management-discusses-q4-2013-results-earningscall-transcript?part=single
29
http://seekingalpha.com/article/2905026-western-unions-wu-ceo-hikmet-ersek-on-q4-2014-results-earningscall-transcript?part=single
30
SEC filings
31
http://seekingalpha.com/article/2905026-western-unions-wu-ceo-hikmet-ersek-on-q4-2014-results-earningscall-transcript?part=single
32
http://seekingalpha.com/article/2905026-western-unions-wu-ceo-hikmet-ersek-on-q4-2014-results-earningscall-transcript?part=single
26

18

Exhibit 17
Corporate Tax Rates
Remitters

Share of global Corporate

Receivers
outflow
Tax rate

Share of global
inflow

Corporate
Tax rate

US

9.2%

39.0%

India

12.1%

34.6%

Russia

6.4%

20.0%

China

11.0%

25.0%

Saudi Arabia

6.0%

20.0%

Philippines

4.9%

30.0%

Switzerland

4.0%

17.9%

Mexico

4.3%

30.0%

Germany

3.4%

29.7%

France

4.3%

33.3%

UAE

3.1%

55.0%

Nigeria

3.6%

30.0%

Kuwait

2.6%

15.0%

Egypt

3.4%

25.0%

France

2.3%

33.3%

Pakistan

2.9%

33.0%

Luxembourg

2.1%

29.2%

Germany

2.7%

29.7%

Netherlands

2.0%

25.0%

Bangladesh

2.6%

27.5%

41.1%
28.6%
51.8%
Source: World Bank, http://www.tradingeconomics.com/india/corporate-tax-rate

30.0%

For WUs 13-15% tax rates to balance, this would mean the jurisdictions that account for the other half
of all global remittance activity have tax rates near zero. But according to an online tax list, very few
jurisdictions have such low tax rates, and WU admits that no jurisdiction outside the US accounts for
more than 6% of its revenue.33
The alternative would be to assume that WU is using some sort of tax loopholes such as inversions or
transfer pricing.
Often drug companies report tax rates comparable to WU. These tax rates are generally the result of
inversion transactions where the drug company transfers intellectual property, such as patents, to low
tax jurisdictions, and then charges the operating subsidiaries in high tax jurisdictions royalties on the IP.
This shifts earnings to the low tax jurisdiction and reduces taxes.
Alternatively, transfer pricing can be used where goods are transferred from high tax jurisdictions subs
to subs in low tax jurisdictions and then sold in order to shift income.
However, according to one tax expert, WU does not seem to have the underlying business model
associated with these type of strategies. A read of the Companys revenue recognition policy does not
suggest the ability to manage revenue, and the primary costs incurred by WU are agent commissions
which dont lend themselves to selective allocation.

33

http://www.sec.gov/Archives/edgar/data/1365135/000136513515000008/wu-12312014x10k.htm pg. 7

19

Without access to its books its impossible for us to know how WU can report such low tax rates, but it
seems that even the Company itself is confused by its own tax strategies. From the most recent 10-K
filing:
As of December 31, 2014, no provision has been made for United States
federal and state income taxes on certain of the Company's outside tax basis
differences, which primarily relate to accumulated foreign earnings of
approximately $5.6 billion... Such taxes could be significant. Determination of
this amount of unrecognized United States deferred tax liability is not
practicable because of the complexities associated with its hypothetical
calculation.34

Thats not very inspiring.

Tax Strategies and the Coming Backlash

There is growing discontent over tax minimization strategies, which have become a hot topic for
countries the world over. In Europe, numerous governments are strapped for cash while much of the
rest of the world, countries that relied on the commodities boom are seeing large holes in their budgets.
Companies like WU, which are already viewed by many as preying on the poor,35 do business in all these
countries, yet appear to pay little, if any taxes. There is an argument that governments should look the
other way if these companies create jobs. In a recently penned letter to the US Senate, Carl Icahn noted
that repatriation of foreign profits to the US will help with job creation.36
Icahn was likely not referring to WU. WU operates in more than 200 countries, but has only 10,000
employees worldwide.37 By contrast, GM employs 15,000 workers in Mexico alone.38 WUs business
model is predicated on agents who run their own unrelated business irrespective of WU. To call WU a
job creator is to stretch the definition.
The low taxes WU pays on its large profits are an affront to governments everywhere. And all it will take
is for one fed-up country to make some noise before every other country start looking at how much WU
pays in taxes vs how much it benefits from operating in that country. If anything, the case of Valeant is a
sobering reminder of the problems that can quickly spawn when corporate practices are seen as
exploitive and unfair.39

34

http://www.sec.gov/Archives/edgar/data/1365135/000136513515000008/wu-12312014x10k.htm pg. 121

http://www.theguardian.com/global-development/2014/nov/29/money-transfer-companies-remittances-tessajowell
36
http://www.forbes.com/sites/leesheppard/2013/05/28/how-does-apple-avoid-taxes/
37
http://www.sec.gov/Archives/edgar/data/1365135/000136513515000008/wu-12312014x10k.htm pg. 20
38
http://www.wsj.com/articles/gm-to-invest-5-billion-to-expand-facilities-in-mexico-1418323909
39
http://www.nytimes.com/2015/09/21/business/a-huge-overnight-increase-in-a-drugs-price-raises-protests.html
35

20

Conclusion
We see WU as a deteriorating business that becomes more obsolete with each passing year.
Furthermore, we believe a combination of capitalized costs and unsustainably low tax rates helped WU
beat estimates in the most recent quarter, and we are highly dubious of a company that almost never
misses earnings estimates.
From a public policy perspective, we take issue with WUs low tax rates, and believe they face severe
headline risk.
Given the fundamentals of the business, we believe another price cut similar to 2012 is imminent. The
last time WU announced aggressive price cuts, the shares responded by correcting down 30%.
Accordingly, we believe another correction is in the offing.
Therefore, we value WU at US$13.75, representing a decrease of 30% from the recent share price of
US$19.64.

Opinion: Strong Sell

21